Public Bill Committee

[Sir Nicholas Winterton in the Chair]

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

Nicholas Winterton: It seems a lifetime since I was last in the Chair for this Committee, but with regard to parliamentary sittings it has been merely a week. We have had a week’s break, and since I was last with you I have visited Taiwan and Northern Ireland. After that I sadly caught a very bad cold, from which I am just recovering, but I am sure that the rapid passage of business today will ensure that my cold goes just as fast.

Mark Todd: The weather in Cheshire?

Nicholas Winterton: The weather in Cheshire is no better than the weather here, sitting on the north bank of the Thames.

Schedule 24

Annual Investment Allowance

Amendments made: No. 146, in schedule 24, page 288, line 34, at end insert—
‘( ) In determining whether expenditure is AIA qualifying expenditure, any effect of section 12 on the time at which it is to be treated as incurred is to be disregarded.’.
No. 147, in schedule 24, page 290, leave out lines 15 to 17.—[Angela Eagle.]

Schedule 24, as amended, agreed to.

Clause 72

First-year allowance for small and medium-sized enterprises discontinued

Philip Hammond: I beg to move amendment No. 204, in clause 72, page 39, line 5, leave out ‘and (3)’ and insert ‘to (4)’.
Thank you for calling me to speak, Sir Nicholas. I hope that you will not find this too taxing, as you have one additional colleague’s name to try to recall in the future. I am grateful for your opening remarks. I was slightly out of breath, having run up from my office thinking that I might be late for the Committee, but of course I had not reckoned on an account of your recess activities, which neatly gave me time to regain my composure.

Angela Eagle: Tantalising.

Philip Hammond: Tantalising indeed. I was also thinking how clever you were, Sir Nicholas, to have selected amendment No. 204 from Taiwan so that the Committee could consider it today.

Nicholas Winterton: Order. The Chairmen’s Panel is very competent, and communication is one of the things in which its members are experts.

Philip Hammond: I know, Sir Nicholas, that you are an aficionado of the latest technology and no doubt had your BlackBerry to hand in Taiwan, which was probably where it was made in the first place.
Clause 72(5) intends to ensure that the effect of abolition of first-year allowances for small companies is felt only in future years “after the relevant date”, which is in April 2008. It is a welcome and common-sense clarification that the measure is not intended to be retroactive and will not undo the provision that was in force in previous years. However, the provisions of subsection (5), which confirms that limitation, apply only to subsections (2) and (3). Subsection (4) deals with the original legislation that set the rates of first-year allowances for small companies for 2004-05, 2005-06 and 2006-07. It abolishes the reference to those provisions in the existing statute. It is not immediately obvious why there is a need to abolish those provisions, which set rates for previous years. Those are rates for years that have gone by, so this is a piece of history. I do not want to over-egg the pudding, but it seems slightly Stalinist to try to erase the provisions from existence when they cannot have any effect on periods after April 2008.
However, if the provisions are to be abolished, it also needs to be made clear that the abolition of the rates for those years is not retrospective. There will be claims outstanding in respect of those previous years, particular the most recent one, 2006-07. Surely if we are to abolish the provisions that set the rates, subsection (5)—which limits the effect to future periods only—needs to apply to subsection (4) as well as to subsections (2) and (3). It has been suggested to me that that is simply a drafting error, but perhaps there is a more complex explanation for the treatment applied to the changes in subsections (2) and (3) compared with that applied to those introduced in subsection (4). The amendment simply seeks to extend the protection offered by subsection (5) to the changes made by subsection (4).

Nicholas Winterton: Ideally succinct. I call Maria Eagle.

Angela Eagle: Sir Nicholas, I would like to make it clear, as I did this morning, that I am Angela, not Maria.

Nicholas Winterton: I do apologise. I know the Minister so well.

Angela Eagle: You are not the first person, even today, to make that mistake, and you will not be the last. Obviously I also forgive you for all such slips in future.
Before turning to the Opposition’s amendment, I should explain that the clause seeks to repeal certain first-year allowances, following the introduction of the annual investment allowance—which we debated this morning—from 1 April this year for corporation tax, and from 6 April for income tax. It removes from the legislation the spent time limit of the higher rate of first-year allowances for small enterprises only. The hon. Member for Runnymede and Weybridge moved an amendment that I believe is based on a misconception. He wondered about the removal of the allowances, and he asked whether there was a reason for that that was not apparent to him in the Bill, or whether there was a mistake in drafting the Bill.
There was not a mistake in drafting the Bill. Essentially, the reason is that this is what I would call the “Monty Python’s parrot” clause. The allowances no longer exist; they have expired; they are no longer. They expired in their own way, and the clause removes them from legislation so as not to have a load of spent provisions clogging up tax law.

Philip Hammond: I entirely understand that, and I sympathise with the intention. However, will there not be outstanding cases, relating to those periods, that have not yet been settled or finally agreed? If we do not put in the saving provision that subsection (5) introduces, those cases will be gone, expunged—I do not want to drop into the hon. Lady’s language. They will never have been part of the legislation. There will therefore be nothing to refer back to. That is the concern. The treatment of the changes made by subsections (2) and (3), that is that they are limited by subsection (5) to future periods only after April 2008, seems entirely sensible, and it would seem entirely sensible to do the same with subsection (4).

Angela Eagle: The provisions were time limited on their introduction, and the legislation that introduced them provided for their natural expiry on given dates. Those dates have now all passed, so it is not appropriate or necessary to include a relevant date for their repeal, as the amendment seeks. I do not think that there is an issue; there is certainly no drafting error. We have checked. Obviously, when we saw the hon. Gentleman’s amendment, we checked whether there was a technical issue or problem. We do not believe that there is, so I hope that with those reassurances, he will withdraw his amendment.

Philip Hammond: I accept what the hon. Lady says, but I still cannot see it in the Bill, and there could be concerns about outstanding claims. Those who have raised the issues will have heard what she has said this afternoon. If necessary, we will come back to the Minister at a later stage, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nicholas Winterton: May I formally, on my feet, apologise to the Minister for getting her Christian name wrong? It was an error on my part, and I do genuinely apologise.

Clause 72 ordered to stand part of the Bill.

Clause 73 ordered to stand part of the Bill.

Clause 74

Cars with low carbon dioxide emissions

Justine Greening: I beg to move amendment No. 160, in clause 74, page 40, line 12, leave out subsection (3).

Nicholas Winterton: With this it will be convenient to discuss amendment No. 161, in clause 74, page 40, line 16, leave out subsections (5) and (6).

Justine Greening: I am delighted to speak to amendments Nos. 160 and 161 to clause 74 on capital allowances and cars with low carbon dioxide emissions. Under section 45D of the Capital Allowances Act 2001, 100 per cent. first-year allowances have been made for expenditure on cars with low carbon dioxide emissions between 17 April 2002 and 31 March 2008. Clause 74 extends that period for a further five years to 31 March 2013. I support extending the period, because it makes sense to lengthen the time over which the tax incentives will be in place, but I question the Government’s change in definition of a low carbon dioxide emission car.
In the same clause the Government’s approach demonstrates the contradiction of their overall problems with green taxation. On the one hand, the clause contains something that is welcome: an extension of the fiscal measure for a further five years. On the other hand, the very same clause contains measures that change the definition of a low-CO2 car to make it harder for cars to qualify for the same provision. It reduces the CO2 emissions figure that cars must not exceed in order to qualify from 120 g to 110 g per kilometre driven.
I understand that a transitional rule will also operate for car leasing contracts entered into before the CO2 reduction comes into effect on 1 April 2008 so that those contracts will be unaffected, which seems sensible. I do not understand, however, why the Government are making it harder and reducing companies’ incentives to use lower emission cars. It just seems contradictory: we are extending the period of a fiscal measure while weakening the measure intrinsically. It seems somewhat of an oxymoron, albeit in the form of a clause in the Finance Bill.
I should better understand the second aspect of the clause, which changes the definition of a low carbon emission car from 120 g to 110 g per kilometre driven, if there was already evidence, for example, that consumers and companies were making great strides towards lower emission cars—in other words, if we had had an initial target, there had been progress towards it, and it therefore seemed sensible to the Treasury to recreate the stretched target effect and encourage a further, new step. The Treasury’s projections for car emissions over the coming years do not seem to reflect that expected movement. I am not clear why the Treasury is now making the fiscal incentive harder to reach, rather than keeping it at the current level.
Let me illustrate briefly what I mean by touching upon the numbers of cars that will be affected by the provisions. I received parliamentary figures from Ministers suggesting that the Government estimate that the number of cars emitting 120 g per kilometre or less will increase from about 435,000 in 2008-09—out of a total 15.6 million cars paying graduated vehicle excise duty—to about 674,000 by 2010-11, which by then would be out of a total 19.6 million cars paying graduated VED. If we retain the current definition of a low carbon emission car, that would represent a growth of about 240,000 cars. By the Government’s estimations, therefore, were we to reduce the level from 120 g to 110 g per kilometre, the number of cars expected to be affected and incentivised by the provision would fall considerably. I estimate the number to be 140,000 rising to 214,000 by 2010-11—a rise of about 70,000 to 75,000 cars. So it would dramatically curtail the impact of this policy.

Peter Bone: Does my hon. Friend agree that this seems to be one of those occasions on which the Government put raising more money above their green credentials?

Justine Greening: I think so. The broader context to the debates in this House and outside on VED centres around the fact that the changes in the Budget to graduated VED were pitched by the Government as environmental changes designed to drive a reduction in CO2. However, we know, from questions answered by Ministers, that that is not the case and that the changes announced this year will cut CO2 emissions from motor vehicles by far less than 1 per cent. So my hon. Friend is right to raise that issue.
If, as the Government appear to have admitted, the changes to VED will not have a dramatic impact on motor vehicle emissions, other fiscal measures will become all the more important. In that case, I could understand why we would need to consider more carefully remaining measures that could affect motor vehicle emissions and see whether they really work. That is why I have proposed amendment No. 160, which is the primary amendment in the group, because it essentially would retain the current definition of a low carbon emission car at 120 g per kilometre. Amendment No. 161 is a consequential amendment that would ensure that the clause remains correct in substance. Those are my concerns with the clause. We support what the Government are trying to achieve, but I question why they are making the incentive harder to achieve.
I would like to ask the Minister a couple of questions that will help to put this debate in a more fact-based context. Will the Minister say how many low carbon emission cars qualified for 100 per cent. first-year allowances between, for example, 2005 to 2007? Of the numbers of cars I have talked about that were outlined in the parliamentary question and answer I have received, how many low emission cars in both the existing and new definition proposed by clause 74 do the Government expect and project will qualify in 2009-10 and 2010-11? I am assuming that that is a subset of the total number of cars that we expect to be paying graduated VED at lower band levels.
Making the test for low carbon emission cars tougher and lowering the grams per kilometre from 120 to 110 will necessarily limit the number of cars that might qualify. Therefore, there is a danger that rather than encourage the use of low emission cars, which is what the clause is intended to do and which we welcome, it will discourage the purchase of greener cars. Even Government estimates about how many of those kinds of cars they expect to be purchased and driven around over the next few years are not particularly confident—no massive jump in the sale of such cars is predicted. Most of the 4 million cars that the Government project will be bought over the next two to three years will clearly be in higher bands rather than the lowest emission bands. I shall close with those comments. I look forward to listening to the Minister’s response.

Angela Eagle: Before responding to the amendments, it might help if I explain briefly that the policy purpose of clause 74 is to extend the 100 per cent. first-year capital allowance scheme for a further five years—until 2013—for businesses that invest in the cleanest cars.
In response to the observations of the hon. Member for Wellingborough, this is an allowance, not a tax, and therefore it actually costs the Exchequer. The scheme is designed to try to improve the incentive for the cleanest cars that are available on the market to be bought by those businesses that operate fleets of cars or are involved in business travel. When considering the clause and amendments, it is important to focus on that particular area, rather than on the entire car fleet; otherwise, we might get ourselves into a bit of difficulty.

Peter Bone: There is a difference, is there not, in trying to drive fleets towards the cleanest cars or towards low carbon emission cars? As the Minister rightly says, we are going for the cleanest cars, but it is a disincentive to move towards the cleanest cars. That seems to be a change in the Government’s policy.

Angela Eagle: I do not agree and I shall explain why. The purpose of extending the 100 per cent. first-year capital allowances scheme for businesses that invest in the cleanest cars—not a clean car—for a further five years and stretching the target again by reducing it from 120 grams per kilometre of emissions to 110 grams is precisely to ensure that the objectives of the scheme as they were first designed are achieved. That is an effective environmental incentive for the presence in the car fleet of the cleanest emitting cars rather than good cars. The cleanest cars at the edge of technological advance will find their way into the car fleets and that will have an effect on the second-hand car market once they are leased, used and sold on. We have focused on a particular part of the market for a particular purpose. The idea behind the original capital allowance scheme, which is being extended and tightened again under the clause, was to keep things at the forefront of technological change.
The two Conservative amendments would prevent us from revising the original carbon dioxide emissions threshold down. We need to do that to ensure that the scheme reflects advances in emissions technology since 2002, when the first incentive scheme was put in place. The amendments would leave the original 2002 threshold unaltered and in place until 2013. However, massive technological change is already happening in engine technology and emissions.
As I said earlier, the scheme is meant to be an incentive and is intended to be at the forefront of bringing the cleanest engines to market in a way that guarantees that people taking a risk designing new technologies get a foothold in the market. That is the point of the 100 per cent. first-year capital allowances, which the hon. Member for Putney did not accept.

Justine Greening: My understanding is that the point of the capital allowances was to encourage a change in behaviour rather than simply to track technological development for the sake of it. The figures that the Government have released suggest that they do not believe that the allowances will change behaviour. That is why I am pressing the Minister to explain whether that is so, not to explain whether there is a need to track technological improvements. I accept that having the most ambitious policy possible may be a consideration, but the ultimate aim needs to be changing behaviour. I do not see anything in the figures that the Government have released that suggest that they feel that such policies, particularly this one, will be successful.

Angela Eagle: It already has been successful, which is why we are tightening it. The scheme to encourage investment in the cleanest cars was introduced in 2002. Since then the carbon dioxide emissions of the UK car fleet have markedly reduced. In 2002, only about 7,000 cars had emissions under the original threshold of 120 grams per kilometre driven, but by 2006—the latest available figures only reach 2006, because of how business car taxation works—the number of eligible cars in the fleets had increased more than fivefold and improvements continue to be made. Therefore to ensure that the scheme continues to secure its policy objective as an environmental incentive, which is to encourage business to invest in the cleanest vehicles at the edge of technological advance, not just to invest in a clean vehicle, and to prevent escalating Exchequer cost and mounting deadweight effects, the carbon dioxide threshold needs to be updated and stretched and made more challenging, as the hon. Lady said. That should be done to secure the policy aim of a generous 100 per cent. write-down of the cost in the first year. The potential cost to the Exchequer of maintaining the carbon dioxide emissions threshold at the previous level of 120g/km to 2013, as the Opposition amendment would provide for, is estimated at £450 million.
The first-year allowances scheme is intended to incentivise business investment in cars with the lowest carbon dioxide emissions: not simply low emissions, but the lowest. Given that policy purpose and the risk of high Exchequer cost and deadweight in relation to the amendments, I urge the Committee to reject the amendment.

Peter Bone: I want to take up some of the things that the Minister has said. First, on the first-year allowance—the 100 per cent. write-down—I have been in business and I have had to make decisions about buying a fleet of cars and I certainly would be attracted to something that offered 100 per cent. first-year allowance. I may have already based my fleet on the 120 g per kilometre and because I am into that fleet structure, I cannot and am not going to change that fleet to 110 g per year. Therefore, I am going to be penalised later on for going into something that the Government encouraged me to do in the first place.

Angela Eagle: There is a transitional arrangement that means that access to the allowance will not change because of the changed threshold for the length of that lease, so the hon. Gentleman’s point is wrong.

Peter Bone: I can only say, from my practical experience, that we might expand that fleet year by year and I certainly would not switch vehicles. I would keep my fleet the same for a considerable period. The issue about the first-year allowance and the cost, which the Minister said is £450 million, is about cash flow. It reverses either when the car is sold or in each and every year because one is not getting the writing-down allowance. Therefore, it is not an overall cost; it is purely a cash-flow issue.

Philip Hammond: On that basis, does my hon. Friend have any idea where the Minister got the figure that she just quoted on the cost of the Opposition amendments? As he rightly points out, balancing charges on the disposal of the vehicle mean that it is simply a cash-flow issue.

Peter Bone: I am grateful for that intervention. I can only assume that that was the cost estimated in the first year, because in the following years it would reverse. It will be interesting if the Government can explain that that cost may be a negative figure of £450 million in year one, but it will be positive in the following years.
The real issue that I want to draw attention to is that we are hiding from the cutting edge of technology. If the Government are really keen on green issues—I do not believe that they are because they do not have the track record that my party has of wanting to improve the environment—they would keep it at 120 g per kilometre because it would encourage more cars. As my hon. Friend the Member for Putney has pointed out already, the proportion of these vehicles will be lower in the future than it is now. Therefore, while we want to see the actual numbers of low carbon emission cars increasing in fleets, for all the reasons that the Minister has said, it is a mistake to reduce the permitted level.
The Government are missing a trick and I believe that that is entirely for financial reasons—they think that it will cost them too much to keep the allowance at this level. It is up to the Government to accept this very minor amendment. It would show extremely good faith for the first time in the Committee if they accepted it.

Justine Greening: I am not wholly convinced by what the Minister has said. I do not understand where the calculation of the £450 million has come from. The Minister claimed that the impact was a fivefold increase in cars—from 7,000 to 38,000 out of a current car population of 15.6 million—which does not indicate that behaviour has changed dramatically when one thinks of the amount of that 15.6 million that would have been purchased by companies. Again, on this and other measures in relation to green taxation, and especially to cars, the Government are in a mess. I will not press the amendment to a vote, but it is almost certain that we will be coming back to these issues in the future. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 74 ordered to stand part of the Bill.

Clauses 75 and 76 ordered to stand part of the Bill.

Schedule 25

First-year tax credits

Philip Hammond: I beg to move amendment No. 212, in schedule 25, page 301, line 34, at end insert—
‘(5) In this Schedule “company” includes a partnership or a business carried on by a sole trader’.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 213, in schedule 25, page 313, line 36, at end add
‘by a company which is incorporated under the Companies Acts on or after 6th April 2008 by a company which is a partnership or a business carried on by a sole trader.’.

Philip Hammond: A number of amendments tabled to schedule 25 have been selected separately and I will try to be brief in discussing each of them. Hopefully we can rattle through them.
The schedule will introduce a payable tax credit in respect of enhanced capital allowances. Enhanced capital allowances were introduced in 2001 and offer 100 per cent. first-year allowances for certain types of qualifying expenditure. Generally it is expenditure that, for policy reasons, the Government wish to encourage, such as expenditure on energy-saving equipment.
I will leave aside the broader question of the efficacy of using fiscal policy to influence corporate investment decisions and focus on some practical questions. We will see over time how effective these measures are in enticing companies to make capital expenditure that they otherwise would not wish to make. We will also judge over time what the economic impact of that is.
Amendments Nos. 212 and 213 address an important point in relation to this schedule. As drafted, the payable credit is available only to companies. By tabling these amendments, we seek to understand why that incentive will not be available to sole traders and to partnerships. I said earlier in today’s proceedings that the Government have a stated objective of maintaining fairness of the tax system by ensuring that people engaged in similar economic activities pay broadly the same overall level of tax, regardless of the legal form that they chose for their business. This discrimination against sole traders and partnerships flies directly in the face of the pursuit of that objective. The Exchequer Secretary must explain why the Government have limited this payable tax credit to those companies that arguably need it least and excluded partnerships and sole traders. The measure is also highly discriminatory against smaller businesses. Small and medium-sized enterprises are overwhelmingly sole traders. Excluding sole traders and partnerships discriminates against them.
I would be the first to admit that the amendments are a clumsy attempt at probing this issue. In order to avoid the daunting task of going through the entire schedule and amending every reference to company or companies, I have taken the coward’s way out and sought to amend the definition of company in this schedule to include partnerships and sole traders. That is inelegant, but practical for our purposes this afternoon. If the Government see the light and accept that the provisions should be extended to include partnerships and sole traders, I will be happy to withdraw the amendment and allow the professional draftsmen to do it in a much more sensible way. I hope that this proposal will at least allow the Exchequer Secretary to respond to the substantive point.
Amendment No. 213 is a necessary consequential amendment because starting dates for the different tax periods would be different if partnerships and sole traders were included. Will the Exchequer Secretary tell us in plain language why, in the face of the Government’s rhetoric about fairness between different types of legal structure, sole traders and partnerships need to be discriminated against in the way that is proposed by the schedule?

Angela Eagle: Before I speak to the amendments, it might be helpful if I set out the purpose of the schedule. The Budget 2007 package of reforms that announced this change was intended to encourage investment. It includes a refocusing of the incentives for small companies towards incentives. First-year tax credits, also referred to as payable enhanced capital allowances, are one of the incentives. Like the annual investment allowance, which we discussed earlier, first-year tax credits are aimed at promoting business investment specifically in environmentally sustainable places. The Government recognise that high and sustainable levels of economic growth must not come at a cost to the environment, and a number of policies are currently in place aimed at trying to make that growth more environmentally sustainable.
The 100 per cent. first-year allowances and ECAs are already available for investment in designated energy-saving and environmentally beneficial plant and machinery—that means water-efficient as well as energy saving. Those allowances deliver a cash-flow boost by way of a shortened payback period to businesses that invest in green plant and machinery, which becomes more attractive to purchasers owing to the reduced relative cost. The purpose of the ECAs is to address market failure. The more environmentally sustainable infrastructure, to which I have just referred, is often much more expensive than less environmentally sustainable water and energy efficient systems.

Philip Hammond: I am sorry to be pedantic, but market failure is a phrase that trips off the lips of Ministers rather too easily. Why is it a market failure just because the environmentally-friendly kit costs more than the non environmentally-friendly kit?

Angela Eagle: It is a market failure simply because the price signal would suggest that one would purchase a cheaper kit—be it water or energy efficient infrastructure—to do the job intended. A more environmentally sustainable kit might have been only just developed—it will probably be new technology, used by fewer people and only just getting its feet in the market—and so be more expensive. I do not need to explain the reasons for that to the hon. Gentleman. The idea, therefore, is to level the playing field in the choice between those two options. That is the economic justification for an ECA, which would be payable if an individual company were to choose a more environmentally sustainable kit over a well-established but less environmentally sustainable one already on the market. That is well-established economic theory on which I do not need to lecture him.
The benefit to businesses of ECAs can be reduced when they are loss-making—this is the point of the schedule before us—particularly when the tax losses cannot be relieved for a number of years, perhaps because the business remains loss-making for an extended period. That would reduce the incentive for loss makers to invest in the green plant and machinery, because they would not get the benefit of the credit. The schedule introduces first-year tax credits available in respect of qualifying expenditure incurred on, or after, April 2008, and will be of particular benefit to start-up companies investing in equipment for their businesses.
The first-year tax credit regime will allow companies, within the charge to corporation tax, to surrender losses attributable to investment in designated energy-saving or water-efficient plant and machinery to the Government in return for a cash payment. The regime is broadly based on the well tested model for research and development tax credits. Obviously, a company may utilise losses that it has made only once, so once a loss is surrendered for a tax credit, it cannot be carried forward or relieved in any other way. The cash payment that a company will receive is 19 per cent. of the loss surrendered—subsequent amendments will deal with that point, so I shall not labour it now. Provisions are in place to vary that percentage, but there is an upper limit, or cap, on the amount that can be claimed, which is a necessary feature of the scheme to prevent the Exchequer from unlimited exposure and to ensure that the annual cost of the measure does not exceed anticipated levels. The cap must be set at a level to ensure that companies of all sizes can obtain a genuine benefit from the tax credit scheme.
The amendments seek to extend the benefits of the scheme to sole traders or partnerships. There are issues here about fraud, abuse and complexity, which we dealt with in a similar context earlier. The hon. Gentleman again raised the point about the Government being in favour of fairness between different legal forms of companies. That is true, but it is not the same as saying that there should be no differences between the tax treatment or legal treatment of different forms of company.
If the hon. Gentleman were to take his comments to their logical conclusion, he would seem to be arguing for a single tax form for all types of company, be they partnerships, sole traders or those limited by legal liability. I am not certain that I understand the philosophical point that he was making when he said that we are discriminating between different forms of company. In UK law there are different legal forms of company that have different types of tax liabilities, ranging from income tax to dividends and corporation tax, and which are long standing in UK law. I am not certain why he seems to be saying that the Government discriminate against those different forms of company, because we do not. There are several different strands of ownership that individuals who wish to set up either as limited liability companies, sole traders or partnerships can choose to adopt.

Mark Field: I understand the point that the hon. Lady is trying to make and do not think that anyone is suggesting that there should be an absolutely identical tax treatment for different sorts of business organisation. Nevertheless, surely the market failures and the cash flow problems that emerge in the early stages of any business, which she put forward as a justification, apply every bit as much to sole traders and partnerships as they do to companies, if not more.

Angela Eagle: There are different tax systems for sole traders and partnerships, which allow them to make different arrangements for writing off investments they make. There are issues relating to how one would define what limited liability partnerships are. For example, there is a long history of limited liability partnerships being used as a way of abusing R and D tax credits, and there are examples that we have to avoid so that in any system in which we create a circumstance where money is available to be paid back, set against losses, we must ensure that that can be done in a way that does not encourage fraud, avoidance or abuse. The hon. Member for Runnymede and Weybridge said that we are discriminating against sole ownerships and partnerships who need those payments the most, whereas companies in fact currently access ECAs far more than sole traders and partnerships.

Philip Hammond: Unless I have misunderstood, they are not available now, so how can companies access them more than partnerships and sole traders?

Angela Eagle: The allowances are available currently, and what we are discussing in this clause is a payment for those who are loss making, and that is what is different.

Philip Hammond: I understand that point, but does she agree that it is a big extrapolation to say that because companies access ECAs more than sole traders and partnerships, they need the payable tax credit more than sole traders and partnerships? It will be small, start-up and unprofitable businesses that can take advantage of this payable credit. We are creating another artificial driver to incorporation. We have seen that before in the incentives that the Prime Minister introduced while Chancellor to incorporate with zero-band small companies rates that had to be clawed back when the consequences were not those that he had wanted to see.

Angela Eagle: The Government’s aim is to encourage and support companies, particularly start-ups, to invest in green plant and machinery, and the tax rules differ for incorporated and unincorporated businesses. With regard to aspects such as tax rates and personal allowances, unincorporated businesses already have more generous provisions than companies for relieving losses in the early years of trading, and allowing companies to surrender losses for tax credits redresses a difference there. There is form in that some schemes have been set up using limited liability to abuse R and D tax credits. That would be likely to happen again if we allowed the extension of this generous scheme to sole traders and partnerships, as proposed in the Opposition amendments.

Mark Field: This is the second occasion on which the Exchequer Secretary has mentioned the notion of fraud and form, as she put it. Can she give the Committee some evidence of this behaviour by sole traders and partnerships that has deprived the Treasury in the way that she has explained? It is important in this debate that we have some direct evidence that we can look at so that we can make a judgment about whether the amendments are the right way forward.

Angela Eagle: Some of the issues with the film tax credit would give such examples. I can write to members of the Committee with examples if that is what they wish. I do not intend to stand here and detail particular instances of fraud and abuse. That would be quite wrong. The hon. Gentleman can take it from me that there are plenty of examples where limited liability partnerships have been created to make extremely dubious claims and avoid tax liabilities. That is far from the intended purpose of either the R and D tax credit scheme or this measure.

Philip Hammond: The hon. Lady has alluded to fraud in the R and D tax credit system. The structure of her argument was that the first-year payable tax credits broadly reflect the arrangements for the R and D tax credits and there have been problems with those. She has mentioned only limited liability partnerships, but says that we will therefore exclude all partnerships and all sole traders. If there is evidence to suggest that there is a problem with limited liability partnerships, she should by all means exclude them, but she should not throw the baby out with the bathwater and exclude all of the sole traders and ordinary partnerships that make up the great majority of SMEs. If there is evidence of such abuse, where is the proposal in the Bill to correct that by excluding partnerships and sole traders from access to the R and D tax credit?

Angela Eagle: I have talked about limited liability partnerships, but we have also seen avoidance schemes where individuals seek to abuse the first-year allowances available to SMEs for expenditure on information and communications technology. There is evidence that these schemes are targeted for avoidance by the self-employed. The anti-avoidance group advice is that we would need very robust anti-avoidance rules if the tax credit regime were to be extended to the self-employed.
The hon. Gentleman should give us some insight into what he thinks could be done if the amendments were accepted to reduce what we believe is a real danger of avoidance activity, which would be very costly to the Exchequer. It is clearly much easier for an individual than a limited company to receive a spurious payment and disappear, although both individuals and companies are within the self-assessment regime. Her Majesty’s Revenue and Customs has the facility to check a company’s address and directors’ details at Companies House. It has no way of checking the bona fides of an individual claimant. It is the hon. Gentleman’s amendment, not mine. He must explain to the Committee whether he is being complacent about the avoidance potential for his amendments or whether he has a view about how he could shore up what we believe is a high risk of avoidance behaviour should his amendments make it on to the statute book.

Philip Hammond: I am slightly taken aback by a challenge from the Exchequer Secretary to explain my proposals for anti-avoidance, when she has been completely unable to explain to the Committee the avoidance that she is so concerned about. She has, however, made a couple of specific points that are worthy of consideration. She referred to the availability of sideways relief in some cases for partnerships and sole traders, and I accept that to some extent, it would be a way of relieving unrelieved capital expenditure for a loss-making start-up business. That is a sound point and worth considering. I do not accept, however, her lecture on economic theory—that where a low-volume product costs more than a high-volume product, it is evidence of market failure.
Angela Eagleindicated dissent.

Philip Hammond: The hon. Lady did say that. It may be evidence of a situation that the Government do not like and want to intervene on, but it is not evidence of market failure. We must be careful about detecting market failure. I may have said this before, but her predecessor detected market failure in every corner, and it is not the culprit in the situation under discussion.
The hon. Lady raised the issue of sideways relief and the way it interacts with the ability of sole traders and partnerships to claim it. I shall seek the Committee’s leave to withdraw the amendment so that I can consider the issue and talk to others outside the House about it. She has not, however, answered the question about reform to the R and D tax credit regime. If there is abuse on the scale and of the order that she talks about, the Government should table amendments to the R and D tax credit regime similarly to exclude partnerships and sole traders, but I have not seen any sign of such activity. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Philip Hammond: I beg to move amendment No. 214, in schedule 25, page 301, line 39, leave out ‘19%’ and insert ‘20%’.
This is a probing amendment; it will not take me a moment to make the point. The amendment seeks to alter the payable rate of credit from 19 per cent. to 20 per cent. There is no particular magic about the 20 per cent. rate, other than that, conveniently, it was the small companies rate before the proposals to increase it still further. We cannot see any magic about 19 per cent. Perhaps there is a complex calculation that shows why the payable credit has been set at that level. It is not, after all, the main rate of corporation tax, it is no longer the small companies rate, and it is not the capital gains rate or any rate that I am aware of. It may be the VAT rate in one or two European countries, but what is the logic of 19 per cent? How was it calculated, and how was it arrived at?

Angela Eagle: It may help if I explain why the Government have set the rate of credit at 19 per cent., which is essentially what the hon. Gentleman asked.
As with the R and D tax credit, first-year tax credits are intended to help loss-making companies by delivering the benefit of the tax relief provided by enhanced capital allowances earlier than they would otherwise receive them, because of their loss-making status. Reflecting the time value of money, and—this is the balance in setting the rate—the fact that we do not wish to incentivise companies to be loss-making, because it would result in all sorts of negative behavioural consequences as I am sure the hon. Gentleman agrees, we discount the rate at which the credit is given to loss-makers. That is the first thing: it must be less than the credit that would be delivered to those making a profit.
Secondly, based on how long a company, on average, makes a loss before it turns a profit as a start-up, 19 per cent. is a generous rate of allowance for companies paying the small companies rate of tax. It was decided upon by undertaking research to find out how long in general start-up companies take to get into profit, analysing how it works and knowing that it must be below 20 per cent. so that we do not incentivise actual loss making. Nineteen per cent. is above the amount of credit that would be implied by taking a value of the time aspect of money for cash flow, which would make it generous.
There is a balance between recognising that in future the rates of tax might change and recognising that the generosity of relief to loss makers and profit makers might shift. The hon. Gentleman might notice that we have taken up the question of how to vary the rate of the credit in future years. However, the key balance is to ensure that we do not reward loss makers to the same degree as profit makers.

Philip Hammond: I am grateful to the Minister for her explanation. The 19 per cent. figure is not quite as generous as she was making out because it has to be set against the intended rate rather than the previous rate of small companies’ tax. She has provided the Committee with an explanation of why the Government have arrived at 19 per cent. and therefore I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Philip Hammond: I beg to move amendment No. 210, in schedule 25, page 302, line 18, after ‘machinery)’, insert
‘or section 45D (expenditure on cars with low carbon dioxide emissions) or section 45E (expenditure on plant and machinery for gas refuelling stations) or section 45F (expenditure on plant and machinery for use wholly in a ring-fence trade)’.
Again, this is a probing amendment and offers the Minister the opportunity to explain why payable tax credits are limited to expenditure qualifying by virtue of section 45A of the Capital Allowances Act 2001, which relates to energy-saving plant and machinery and section 45H, which relates to environmentally beneficial plant and machinery. The Capital Allowances Act 2001 also provides for first-year qualifying expenditure to be incurred in other areas. For example, section 45D provides for expenditure on cars with low carbon dioxide emissions, which is the subject we have just been discussing. Section 45E provides for expenditure on plant and machinery for gas refuelling stations and section 45F provides for expenditure on plant and machinery for use wholly in a ring-fenced trade.
As I understand it, all of those areas qualify for enhanced capital allowances. When the Minister made her introductory comments, she explained that enhanced capital allowances were not usable by loss-making companies. In order to incentivise start-up businesses in particular and companies that are not profitable and thus not able to benefit from enhanced capital allowances in general, a payable credit was introduced. Nowhere has she explained why the payable credit is available only for expenditure qualifying under sections 45A and 45H. This probing amendment therefore would insert provisions for the qualification to extend to qualifying expenditure by virtue of sections 45D, 45E and 45F. Perhaps the Minister could explain the logic behind the restrictive approach of the Government.

Angela Eagle: The amendment would extend the availability of first-year tax credits so that expenditure on cars with low carbon dioxide emissions, plant and machinery for gas refuelling stations, and plant and machinery for use in wholly ring-fenced trades would qualify.
Although some expenditure currently qualifies for the first-year allowances, the Government’s intention has always been clear: to support investment by loss-making businesses and environmentally beneficial and energy-saving technologies. Enhanced capital allowances were only extended to low carbon emission cars and gas refuelling stations temporarily to incentivise take-up of those technologies. Through ECAs, energy and water saving technology is a permanent feature of the capital allowances code. Energy-saving and water-saving technologies tend to be more expensive than comparable equipment that is not environmentally-friendly and tax incentives are intended to compensate for that.
The Government expect the chief beneficiaries of first-year tax credits to be start-up businesses seeking to ensure that their carbon footprint, and water and energy usage is reduced. It does not therefore make sense to extend this to the purchase of vehicles, particularly because low emission vehicles also benefit from other tax relief—namely, the reduced vehicle emissions duty and reduced company car tax.
The hon. Gentleman said that this is a probing amendment, but he seems to want to extend first-year tax credits to all plant and machinery used by North sea oil companies. That is an unnecessary incentive given that the Finance Act 2006 made a change that indexes forward losses attributable to capital allowances, which will provide up to 42 per cent. more relief than was previously available. The hon. Gentleman will know that the tax regime for North sea oil is different, and is wholly appropriate to what is a particular area of activity. I presume that he supports the ring-fencing of the North sea oil regime. Taken together, the extensions suggested in the probing amendment would cost £100 million, which is several times the current estimate of the cost of first-year tax credits. So I hope that with those explanations the hon. Gentleman will assume that the Government’s intentions have been probed, and that he will withdraw the amendment.

Philip Hammond: I accept the Exchequer Secretary’s point on equipment for use in a ring-fenced trade. We will come to petroleum revenue tax later in the Committee, and can address those issues then. All I did was to take the areas that are eligible for enhanced capital allowances but which were not included in the payable tax credit. I understand what the hon. Lady says, but in her introduction she suggested that this was simply a measure to deal with the situation where enhanced capital allowances were currently of no use to companies, to ensure that they could benefit from them. She said a few moments ago that she did not want to extend the allowances to low carbon dioxide emission cars, because this was only ever a temporary arrangement. We have just debated a clause in which she extends that temporary arrangement by another five years to 2013. I would have thought that investing in the cleanest—to quote her phrase—car was indeed an investment in environmentally-friendly technology.

Angela Eagle: The hon. Gentleman is aware that there are generous tax allowances—which we have just debated—for those businesses that wish to purchase the lowest-emitting cars, but this is another area of assistance, which includes payments for tax credits. Just because there is one incentive in one place in the tax system for a car, that does not mean that we should extend all other sustainable incentives to cars. I would have thought that the hon. Gentleman could accept that the car issue is being dealt with in that instance, and that here we are dealing with energy efficiency and water-efficient infrastructure.

Philip Hammond: The Exchequer Secretary is wrong that there are provisions elsewhere. She is referring to clause 74 on energy-efficient cars. The point is that the cars covered by clause 74 may attract enhanced capital allowances, but in these circumstances—companies that are not profitable—the cars will be of no value to them. That is precisely why the hon. Lady is introducing the payable tax credit. As she says, the Government have been truly probed and we have understood something of the Exchequer Secretary’s thinking. I am not sure whether Committee members will consider that thinking entirely logical, but at least we have an explanation of it. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Philip Hammond: I beg to move amendment No. 211, in schedule 25, page 302, line 20, leave out ‘2013’ and insert ‘2018’.
This is another probing amendment: why is the cut-off date for the payable tax credit set at 2013? There was no mention of a cut-off date in the draft legislation that was issued with the technical note for consultation, but 2013 appeared in the published Bill. I have no particular attachment to the 2018 date, but I want to understand the rationale for the 2013 date being in the Bill—rather than leaving the regime as an open-ended one that the Government could change at any time—especially as there was no consultation on the proposal to include an end date.

Angela Eagle: The intention of the date is to create a structure whereby we can assess—when we get there—how effective the system has been and whether it needs to be reviewed, changed, rolled forward or abandoned. Part of that is about evaluating the effectiveness of policy. The thinking behind the 2013 date is that it creates an appropriate time by which the system could be up and running and gives us time to assess the effect that it is having so we can return to it and consider whether to extend it further, roll it forward or abandon it. It is about assessment. The feeling was that setting the date at 2013 provided the right time scale within which to carry out a reasonable assessment of how well the system was working, whether it was giving value for money and whether it merited being continued or changed.

Mark Field: Can the Minister explain precisely how this will operate procedurally? If, as is being suggested, the period will come to an end in March 2013, is she suggesting that the process will go ahead up to the Budget in 2013, whereupon it will immediately be extended or not extended and therefore got rid of? Is that period sufficient? I think that my hon. Friend the Member for Runnymede and Weybridge had in mind that the regime looking at the credits should be extended over a slightly longer period—perhaps 10 years—during which the 10 per cent. annual write-offs, which we discussed this morning in relation to similar allowances, could be considered. I am interested in how the Minister envisages the provision being put in place procedurally and what the process will be, because realistically, for decisions to be made, we are talking effectively about a two or three-year process, whereupon 2013 will shortly be upon us.

Angela Eagle: The intention is to see how the new system works, how it beds in and what effect it has. Hopefully, it will have a positive effect. I believe that that will be so, but we have to consider the evidence. As 2013 approaches, we will have evidence and we will be in possession of some facts about how many credits have been paid, and what they have achieved in reality in terms of ensuring that more energy and water efficient infrastructure has been bought and installed in the economy. We will also be able to assess the value and usefulness of the expenditures implied by the tax credit being paid.
I am sure that, as is usual in the assessment of the effectiveness of particular credits and policy, there will be calls for evidence and consultations with those who have used the credit. Then we will be able to have a debate about whether the policy needs tweaking or changing or whether it has served a useful purpose. All of that will take place in good time so that a useful policy will not be ended suddenly. Officials are well aware of the time scales set in the Bill and will be able to work with those and make a seamless transition to a deepening scheme of even greater effectiveness or to a policy decision that the scheme has achieved its useful purposes, whereupon it will be taken and it will be dealt with accordingly.
It is too early to say, other than in theory, but there is no particular problem with 2013 as a date: it provides time for the scheme to bed in, for people to get used to using it, for officials to assess how it is working and for there to be good evidence of its working. At the appropriate time, decisions on future structures will be arrived at sensibly.

Mark Field: Given that the Government make a great play of their commitment to environmental taxes and environmental changes in respect of the behaviour of individuals and businesses and talk readily about how we have to plan for a considerably longer period ahead, up to 2050, it is a little bit curious that such a short period is allowed here. No time restriction is needed in the schedule. Obviously, a future Finance Bill could make amendments if there were concerns about the way in which the provision was operating at some point in the middle of the next decade. It is slightly curious that everything is being talked of in terms of targets for 2020 or for 2050, yet in this regard it is a relatively short period of time in which there will be direct scrutiny of whether these particular allowances are working.

Angela Eagle: There are other examples of such allowances being introduced for five years, assessed and then rolled forward or not. Clause 75, on gas refuelling stations, was for a five-year period initially to see how effective it was. After sufficient evidence had been gathered there was a power to extend it and there is a power to extend this. I do not think that it is an issue that should unduly worry the Committee.

Philip Hammond: I am grateful to the Minister for her explanation—in fact, I rather agree with her. I am rather in favour of sunset clauses in general. But I cannot help noticing that she seems to think that they are a good idea where provisions introduce concessions to the taxpayer, and my experience in Committee has been that Government are rather more resistant to sunset clauses when the boot is on the other foot. I would be happy to agree that most things in this Finance Bill should have a 2013 sunset clause—

Angela Eagle: Does that include income tax?

Philip Hammond: —that way the Government have to do all the good things that the Minister talked about: evaluating how it is working, ensuring that there are not unintended consequences and seeing if it needs tweaking to work better. A sunset clause would be a good idea with many innovations.
The Minister said, from a sedentary position, “Does that include income tax?”—no, of course not. I am talking about innovations; new ideas. Later in Committee we might suggest that sweeping new powers for HMRC to enter premises should be time-limited, so that we can evaluate how they have worked. It is a very good idea in general but is typically applied in a one-sided way.
I am grateful to the Minister for her explanation. We will be quoting her comments from the Committee record back at her, as we seek to introduce sunset clauses in relation to other provisions in future. Its purpose having been served, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Philip Hammond: I beg to move amendment No. 208, in schedule 25, page 307, line 14, after ‘tax’, insert ‘that is due and payable’.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 209, in schedule 25, page 307, line 23, leave out from ‘as’ to end and insert ‘is just and reasonable’.

Philip Hammond: Paragraph 18 of the new schedule provides for HMRC to make payments in respect of first-year payable tax credits claimed by companies. Payments are to be made when inquiries into a company’s tax return are completed. There is also a provision that enables HMRC effectively to set off payable tax credits against corporate tax payments due from the taxpayer and, equally, to make provisional payments in respect of payable tax credits—I assume that that is where inquiries are ongoing—where the final corporate tax obligations of the taxpayer are not yet resolved, and thus there may be some need in the future to offset some element of corporation tax.
Amendment No. 208 simply seeks to clarify that only tax due and payable can be set off against payable tax credits. That will ensure that HMRC cannot withhold payable tax credits against a future liability to corporation tax that will become due at a point in the future in respect of a later chargeable period. I hope that that was always the intention and that the Minister can accept that the words “due and payable” simply clarify that intention.
Amendment No. 209 seeks to clarify the situation with regard to provisional payments on account of first-year tax credits. As drafted, the legislation—as we have so often seen elsewhere—gives HMRC absolute discretion on the payment of provisional tax credits. The amendment would make it clear that the amount paid provisionally has to be “just and reasonable”. I was happy to hear, earlier in our proceedings, the Exchequer Secretary saying that “just and reasonable” is a well established term in the tax statutes. I think she said that it occurred 72 or some other large number of times throughout tax legislation—she read that out this morning. All we are seeking to do is to ensure that HMRC’s behaviour in relation to provisional payments of payable tax credits is just and reasonable. That is an appropriate restriction on HMRC’s discretion and I hope that the Minister will agree.

Angela Eagle: The amendments would change the rules for how a first-year tax credit can be set off against other tax liabilities and impact on the discretion that Her Majesty’s Revenue and Customs has to make a payment when an inquiry has been opened into a tax return. I do not believe that the Opposition’s amendments are necessary. The Government have based the design of the first-year tax credits on the successful research and development tax credits for small and medium-sized enterprises. The two subsections that the amendments would change are mirrored in the R and D tax credit legislation, and the Government have not received any representations from business that those conditions would benefit from being changed.
The first amendment would limit the scope of paragraph 18(2) by stipulating that amounts payable in respect of first-year tax credits, or interest on such credits, can be used to discharge only those corporation tax liabilities that are “due and payable”. However, those additional words will have no effect, because paragraph 18(2) is drafted in terms of discharging liability to pay tax, not liability pure and simple. The provision would not allow for the tax credit to be set off against expected liabilities in any case; it could be set off only against crystallised liabilities to pay. In effect, therefore, liability to pay is just another way of saying that the corporation tax must be due and payable. So the additional words are unnecessary.
On the second amendment, HMRC is under no obligation to make a payment where an inquiry is ongoing, but in the interests of providing support to business where possible, HMRC can use its discretion to make payments, for example, on the elements of the claim about which it is happy, while the inquiry is still open. The amendment would change the basis on which HMRC may make such provisional payments to require it to make provisional payment on a “just and reasonable” basis. Given that HMRC is under no obligation to pay, and does so at its discretion in order to be as helpful as possible to the taxpayer concerned, the amendment would undermine the beneficial feature of the legislation and might—paradoxically—lead to HMRC deciding that it will not make any payments at its discretion, to avoid being challenged in court. I urge the Committee to reject those unnecessary amendments.

Philip Hammond: On the first amendment, the Minister has clarified the intention. She says that the amendment is unnecessary—whether or not it is, she has clarified the point, so I am grateful to her. I am rather less happy about her response to amendment No. 209. I would have thought that HMRC would always be expected to act justly and reasonably. Frankly, I did not care much for her tone. She said that if we impose on HMRC an obligation to act justly and reasonably, it might decide not to make any payments at all. What is HMRC? We are Parliament. We make the decisions, and Ministers, who are accountable to Parliament, ensure that they are carried out properly. That is not the job of some unaccountable, invisible body using its unfettered discretion in a fit of pique, because its Parliament has sought to constrain it, and deciding that it will not make any payments or implement the Government’s will.

Angela Eagle: I think that the hon. Gentleman is going slightly over the top, perhaps because we have been in Committee all day. I am sure that he will agree that HMRC should not be put in a situation where it should pay tax credits to companies that have not paid corporation tax. His second amendment addresses a situation in which HMRC is trying to be helpful to a business over which an inquiry might be ongoing. In certain circumstances, if it is happy with bits of the tax payments or liabilities, it can make payments. His amendment would make that not discretionary, but subject to “just and reasonable” clauses, which could be challenged in a court. That seems unreasonable given that HMRC cannot make tax credit payments to organisations that might have outstanding liabilities against which they can offset tax credit liabilities. That is perfectly reasonable in my view.

Philip Hammond: The hon. Lady’s position appears to be that it would be outrageous if HMRC was subject to any oversight from a court of its behaviour.

Angela Eagle: That is not what I said. Do not be ridiculous.

Philip Hammond: I think that if the hon. Lady reads the record, she will see that that is exactly what she said. She said that HMRC must be completely unfettered in the use of its discretion to make such payments as it thinks fit. In contrast, under amendment No. 209 it would make payment on a provisional loss of such amount as is “just and reasonable”. Should the courts ever become involved in looking at what is just and reasonable, I think that they would take into account an ongoing HMRC inquiry. They would hopefully look at the amount that should be paid in the light of that.
We are merely seeking to establish the principle that HMRC should not have areas of unfettered discretion in this way that could thwart the will of Parliament and the intention of the Government. I thought that amendment No. 209 was entirely unexceptionable. I thought that the Exchequer Secretary was going to bob up and say that it was completely unnecessary because there is a long-established principle that HMRC, as with any Government body, always has to act in a way that is just and reasonable because it is subject to judicial review. [Interruption.] Now she is saying that it is. A few moments ago she told us that she did not think that it was at all reasonable for HMRC to be subject to the oversight of the courts.

Angela Eagle: The hon. Gentleman should not put such ridiculous words in my mouth. I was talking about a context in which a tax credit claim is outstanding and where there is an inquiry into whether an organisation has paid its corporation tax. I said that in order to be helpful, HMRC should be able to make payments in areas of the tax return that it is happy with. That is the context for this discussion and it is not any wider than that.
The hon. Gentleman should not seek to put words in my mouth and widen the context. This is a very narrow context based on what is the perfectly reasonable premise that HMRC should not be forced to pay tax credits to companies when it is not satisfied that they have paid their corporation tax liabilities and that tax credits can be kept aside to cover corporation tax liabilities in the event of an ongoing inquiry that may discover outstanding corporation tax liabilities. That seems perfectly reasonable to me and the hon. Gentleman should stop hyperventilating and putting words in my mouth in an attempt to widen the context when I am making very specific comments.

Philip Hammond: That was a very long intervention, Sir Nicholas.

Nicholas Winterton: Clarification.

Philip Hammond: As it stands, the schedule says:
“In those circumstances HMRC may make a payment on a provisional basis of such amount as it thinks fit.”
As amended, it would read:
“In those circumstances HMRC may make a payment on a provisional basis of such amount as is just and reasonable.”
I suggest that all of the hon. Lady’s concerns would be properly taken into account in determining what is just and reasonable. HMRC would still have discretion, but it would be a discretion fettered by a requirement to behave in a way that was just and reasonable.
As I said, I was expecting the hon. Lady’s response to be that the amendments were unnecessary because HMRC always would behave in a way that was just and reasonable and by long-established principle would be subject to the intervention of a court if it did not. She has not chosen to go down that route, but has decided to go down one that says that HMRC must have unfettered discretion.
I am disappointed that in this group of amendments, we have had a perfectly satisfactory answer to amendment No. 208 and a very unsatisfactory answer to amendment No. 209. I tabled the amendments as probing amendments, but I am not happy with the answer that the Exchequer Secretary has given to amendment No. 209.

Peter Bone: I urge my hon. Friend, if possible, to put this matter to a vote. It is an extraordinary explanation that, if we insert “just and reasonable”, HMRC will have a hissy fit and not make any payments at all. That is a remarkable statement from the Exchequer Secretary.

Philip Hammond: The Minister is smiling, but when she reads the record she will understand what my hon. Friend means. She may perhaps not have intended to say what she did say.

Angela Eagle: Before the hon. Gentleman finishes, perhaps I can help him even further. What he is arguing is that there should be a just and reasonable test for what is currently at the discretion of HMRC. Its discretion in what is meant to be a helpful activity—if there is an inquiry ongoing and HMRC is happy with one part of the tax return, it might make a tax credit payment rather than not do so—is turned by the hon. Gentleman’s amendment into something that can be tested in the courts using the “just and reasonable” structure.
A just and reasonable provisional payment has to reflect the ongoing inquiry and therefore prejudge the issue under consideration. I am not sure that a judge would wish to be asked to make that judgment while an inquiry was ongoing. If companies received payments before their final tax position was calculated, were able to request a payment on account and were then overpaid tax credits, HMRC would need to make a specific assessment to recover the overpayment, which would make the mechanics of the system even more cumbersome and turn a provision that is meant to be helpful into something different.
I hope the hon. Gentleman will acknowledge that his amendment creates those kinds of problems, and turns what is meant to be helpful—

Philip Hammond: Is this an intervention?

Angela Eagle: I was attempting to be helpful before the hon. Gentleman put his amendment to the vote. If he does not like the explanation I have given, he knows what he has to do about it.

Philip Hammond: With respect, I am not surprised that officials would give the Minister the kind of briefing she has just read out. If I were doing their job, I would prefer not to be subject to any kind of oversight, rather than to be subject to it. She now appears to be arguing that the courts could not decide what was just and reasonable, but HMRC can. That does not strike us as very reasonable. As I understand it, the amendment would require that, when a payment is to be made, the amount of such payment is the just and reasonable amount. I beg to ask leave to withdraw amendment No. 208, but I would seek your permission, Sir Nicholas, to press amendment No. 209 to a Division.

Amendment, by leave, withdrawn.

Amendment proposed: No. 209, in schedule 25, page 307, line 23, leave out from ‘as’ to end and insert ‘is just and reasonable’.—[Mr. Hammond.]

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 17.

Question accordingly negatived.

Nicholas Winterton: We are still on schedule 25. I say to the Committee in a helpful way that the last debate, important though it is, was somewhat—

Peter Bone: On a point of order, Sir Nicholas.

Nicholas Winterton: In a minute. The last debate was slightly laboured. We need to make progress. I say that to Committee members of all parties: I am here as a servant of the Committee, and in no way do I seek to dictate what goes on, but there are still important matters to be discussed, and I want to ensure that adequate time is available for them. If Mr. Bone wishes to raise a point of order—I hope that it will be a point of order—I am grateful to him for rising.

Peter Bone: On a point of order, Sir Nicholas, I heard the Division declared with eight for the Ayes, but I thought that there were nine for the Ayes, not eight.

Nicholas Winterton: I am grateful. Of course, I rely on those who add up the voting list. You are absolutely correct. The Ayes were nine, the Noes were 17. It does not affect the result, but you are quite right. There was a late vote that failed to be counted by the Clerk. It was my fault for not correcting him, so I take the blame and he does not. I am grateful to you for drawing it to our attention. My subsequent remarks remain the same. We are still on schedule 25.

Philip Hammond: I beg to move amendment No. 205, in schedule 25, page 310, leave out lines 5 and 6.

Nicholas Winterton: With this it will be convenient to discuss the following amendments: No. 206, in schedule 25, page 310, leave out lines 12 and 13.
No. 207, in schedule 25, page 310, leave out lines 16 to 20.

Philip Hammond: Paragraphs 24 and 25 of proposed new schedule A1, which will be inserted in the Capital Allowances Act 2001, set out the circumstances in which the payable tax credit must be repaid. If there is a disposal within four years, part or all of the credit will be clawed back. One would clearly expect such a provision in legislation of this type. However, as drafted, the clawback will catch intra-group transfers where ownership of an asset changes, but a continuity of business provision applies: in other words, a transfer subject to section 343 of the Income and Corporation Taxes Act 1988, where the legal owner of the asset changes but the beneficial ownership and control on an intra-group transfer does not.
I suggest that it is inappropriate to claw back payable tax credits simply because the ownership of the asset has shifted within a group of companies where a continuity of business provision is in effect. Proposed new paragraphs 25(5)(a) and 25(7)(a) already deal with situations in which assets are disposed of at arm’s length. Sub-paragraphs (5)(b) and (7)(b) deal only with transfers intra-group, which are subject to the provisions in section 343 of ICTA 1988. The amendments would delete those two sub-paragraphs and sub-paragraph (8), which provides a definition, so that there will be no clawback where the transfer of ownership of the asset is an intra-group transfer and the business continuity provisions of the Income and Corporation Taxes Act 1988 apply.
If the Exchequer Secretary is not prepared to accept the amendment, can she explain what risk to the Exchequer needs to be dealt with in this regard? It is not obvious that there is any scope for abuse or avoidance created by excluding intra-group transfers from the clawback provisions. Our concern is that corporate reorganisations will be unnecessarily inhibited, but obviously if there is a serious avoidance issue, we will be pleased to hear what that is from her and certainly give it proper consideration.

Angela Eagle: I hope that I can explain the avoidance potential and persuade the hon. Gentleman not to push his amendment, which seeks to undermine the effectiveness of the clawback mechanism included in the first-year tax credit regime. That mechanism is intended to protect the Exchequer by preventing a business from claiming first-year tax credits for an asset and then immediately selling it on. Where a company sells an asset that has been subject to a tax credit claim within the clawback period, we will potentially claw back, by means of an assessment, any tax credits paid. However, the company will be able to keep the tax credits that relate to any loss made on the disposal of an asset. If the asset is scrapped, there will be no clawback.
The amendments would withdraw the potential for a clawback of first-year tax credits where a company transfers an asset as part of the transfer of a trade and one of the continuity of business provisions applies—in other words, intra-company transfers. The continuity of business provisions state that in certain circumstances where an asset is transferred from one company to another as part of the transfer of a trade, transfer of the asset is ignored as a disposal event for capital allowance purposes. The result is that the successor company gets the same capital allowance and charges as the predecessor company would have done if it had continued to carry on the trade.
However, such an asset transfer must be treated as the disposal of the asset for first-year tax credit purposes and the clawback will be considered if the asset transfer took place within the clawback period. Without such a provision, the company could easily avoid a clawback charge by transferring the asset with its trade to a new company in the same group. The successor could then immediately sell the asset without being subject to a clawback charge, as it had not received a tax credit in the first place. The amendment would therefore undermine the integrity of the first-year tax credit regime, so I hope that the hon. Gentleman will agree that there is a potential problem here and withdraw his amendment as a result of my explanation.

Philip Hammond: I am grateful to the hon. Lady. She has given an example in which a tax-avoidance ruse could be introduced. It strikes me that another way of dealing with this, which would avoid any impediment to ordinary corporate reconstruction or reallocation of assets within a group, would be to ensure that the clawback provision persisted so that the potential for clawback was not only on the first transfer, but persisted for future transfers. I think that she was saying that, if a transfer were made without clawback, a future transfer outside the group would not be subject to clawback, which would give rise to a potential for avoidance.
I would like to accept the hon. Lady’s point, as she makes a good case against the amendment as it is drafted, but I would prefer the solution to be in provisions that allowed the clawback ability to persist and endure beyond the first transfer. That way, so long as transfers were made intra-group, they would be okay, but if one were subsequently made outside the group, the clawback would be applied to the transferee within the group who had received the transfer of the asset from the original company that received the payable credit.
I will not pursue that at this stage, because that is clearly an issue of substance, but I think that I have a difference with the Exchequer Secretary over how best to address the avoidance concern. I want to go back and check how significant the concern about inhibiting intra-group transfers really is, and whether it is something that we need to ask the Government to look at again on Report. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Twenty-fifth schedule to the Bill.

Philip Hammond: I have one additional point that was not contained in any amendment. That is because it was drawn to my attention too late and because when amendments are tabled, Sir Nicholas, it gives Ministers too much notice. It is always good to have one that they do not have notice of so that we can see how they do. —[Interruption.] It will be the Financial Secretary’s turn soon.
Can the Minister tell the Committee how the upper limit for payable first year tax credits, which is set at the higher rate of £250,000, and taxpayers PAYE plus the NIC contributions bill, interacts with payable R and D tax credits? That is a simple question. Can she confirm that, if a company has claimed R and D tax credits, the full upper limit for payable first year tax credits would still be available to it—there is no offsetting of one against the other, it does not use up its entitlement to first year tax credits if it has already claimed payable R and D credits?

Angela Eagle: There I was, putting my glasses away, but it was too early. I can confirm that the R and D cap and the first year tax credit upper limit are completely separate. There is no interrelation of the sort suspected by the hon. Gentleman.

Question put and agreed to.

Schedule 25 agreed to.

Clause 77 ordered to stand part of the Bill.

Clause 78

Small pools

Jane Kennedy: I beg to move amendment No. 145, in clause 78, page 42, line 33, at end insert—
‘(5) The Treasury may by order substitute for the amount for the time being specified in subsection (3) such other amount as it thinks fit.
(6) An order under subsection (5) may make such incidental, supplemental, consequential and transitional provision as the Treasury thinks fit.’.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 215, in clause 78, page 42, line 33, at end insert—
‘(5) The Treasury may by order substitute for the amount for the time being specified in subsection (3) such greater amount as it thinks fit.
(6) An order under subsection (5) may make such incidental, supplemental, consequential and transitional provision as the Treasury thinks fit.’.

Jane Kennedy: Thank you, Sir Nicholas, and welcome back after your holiday.

Nicholas Winterton: Holiday? Certainly not.

Angela Eagle: Break.

Jane Kennedy: My hon. Friend suggests “break” as an alternative, during which, I have no doubt, you worked extremely hard in the interests of your constituents and of the Committee, scrutinising the amendments being tabled and selecting those suitable for consideration. It is a pleasure to be here under your chairmanship.
The amendment is in my name, but perhaps it would be helpful to the Committee for us to have a slightly wider discussion about the purpose of the clause. Clause 78 builds on the simplification provided by the introduction of the annual investment allowance. It delivers a further simplification of the capital allowances scheme, which will be of particular benefit to the smallest businesses, although I know that Opposition Members do not share that view.
The measure is a direct response to suggestions made during consultation on the capital allowances reforms over the past year. It will enable businesses to accelerate the tax relief that they receive by claiming and writing down the allowance for all of their unrelieved capital expenditure on plant and machinery, where the unrelieved expenditure in either or both their main and special rate pools does not exceed £1,000. As businesses will no longer have to calculate writing down allowances on very small balances each year, that will result in a significant administrative burden saving, provide a modest cash flow boost and encourage further investment. The introduction of the measure will enable businesses to write off 536,000 main rate pools and 600 special rate pools in the first year. Allowing pools to be written off in this way avoids the need to write down pools over a very long periods, in some cases beyond the economic life of the asset. It is therefore in line with the wider principle of aligning capital allowances to the economic life of the asset.
After the Finance Bill was published we received further representations to the effect that the small pools limit should be kept under regular review, and amended as and when appropriate. Both the Opposition’s amendment and our amendment seek to respond to those representations. They both introduce a Treasury power into clause 78, enabling the small pools limit to be varied by secondary legislation. The difference between the two approaches, and the reason I ask the Committee to reject the hon. Gentleman’s amendment—unless it is a probing one—is the flexibility that that power provides.
The Opposition’s suggested power only allows the increase of the small pools limit. I think that I understand why the hon. Gentleman suggests that. Our amendment mirrors our approach in other clauses in this part of the Bill. It allows us to increase or decrease the limit. However, I agree with Opposition Members that it is much more likely that the limit will be increased. It may be, however, that wider economic circumstances and the benefits of the AIA mean that in future years a lower limit would achieve the same benefit to business. It is also possible that in the face of abuse, the Government of the day may wish to reduce the limit. I believe, therefore, that the Opposition amendment would tie the hands of a Government wishing to react to the evidence and changing circumstances in the most appropriate way. That is the purpose of our amendment and that is why I think that it is preferable to that of the hon. Member for Runnymede and Weybridge, but I would be interested to hear what he has to say.

Philip Hammond: The Financial Secretary has set out the case for both my amendment and for hers. I was fascinated by the fact that she knows that there are 536,000 main rate pools that will be written off by the amendment. It is interesting that somebody at the Treasury or HMRC is counting them. I am wondering how they would get the figure. Presumably they would have to go into the individual tax computations, look at the pools and assess how many of them were above or below £1,000. I do not want to dismay any officials in the room, but I am minded that Sir Peter Gershon might be interested that somebody has been going through all the returns and checking how many pools there are below £1,000.

Jane Kennedy: The hon. Gentleman may be interested to know that I am told that 618,000 businesses have main pools of between £1 and £1,000.

Philip Hammond: I apologise. I thought that the right hon. Lady said 536,000. In her opening remarks she must have given a different figure. There are clearly two people in HMRC counting pools, or perhaps more than two people. Perhaps it is more than one-man-year’s worth of work, but valuable work it is.
The Financial Secretary has essentially made the case. We have a difference of view. We think that this is a good measure; we support the underlying measure in clause 78. However, it is a shame that the Government have spoiled it by seeking to take a power that would allow them to reduce the £1,000 cap on small pools that can be written off.
It is entirely reasonable to take a power to allow the cap to be increased. As I said earlier—I believe that the Financial Secretary was not in the room—we understand that it would not be appropriate to index, to have a tedious indexing of small amounts every year. However, we would welcome an assurance from the Financial Secretary that the Government’s intention was to periodically uprate the cap so that it rose broadly in line with inflation. If we gave the Government power by order to cut the cap, effectively to nullify a measure that Parliament had agreed, the right hon. Lady could cut it to £50 or £20, removing much of its benefit. That is why we sought to ensure that this was an upward-only revising provision. I accept that the Government amendment is necessary. Our amendment would have been preferable, but I am not about to ask my hon. Friends—all three of them—to vote against the Government amendment. I hope that the Minister will reflect on my comments.

Amendment agreed to.

Clause 78, as amended, ordered to stand part of the Bill.

Clause 79 ordered to stand part of the Bill.

Schedule 26

Special rate expenditure and the special rate pool

Question proposed, That this schedule be the Twenty-sixth schedule to the Bill.

Philip Hammond: I did not wish to move amendment No. 216, but I want to ask the Financial Secretary a question. It was raised at the open day by the Chartered Institute of Taxation. Can she explain how an election under section 198 of the Capital Allowances Act 2001 will apply in circumstances when an election is made under paragraph 16 of schedule 26, as an election under paragraph 16 can be made only at tax written-down value? Section 198 of the 2001 Act is an election to apportion sale price on the sale of a qualifying interest. I should be grateful if the right hon. Lady could explain to the Committee how that works. I am sure that she is briefed on such an issue because it was raised at the open day.

Jane Kennedy: Schedule 26 introduces the new chapter to the Capital Allowances Act 2001 that defines all expenditure and long-life assets, integral features and thermal insulation as we discussed earlier, and special rate expenditure. It brings into effect the new special rate pool and sets the rate of writing-down allowance for special rate expenditure at 10 per cent. It preserves the North sea fiscal regime but, as a result of changes introduced by clause 103 that relates also to the North sea, the hon. Gentleman says that I should have briefing on his specific question. It is part of the blood sport of such Committees for the Opposition to find weaknesses in the briefing of Ministers. I do not have a specific answer to his detailed question, but I undertake to find out the answer, write to him and share it with the Committee.

Philip Hammond: The Minister was frank about her position. She kindly circulated to members of the Committee the questions that were asked at the open day and therefore might have anticipated that some of them might be asked in our proceedings. Perhaps she will ask her officials to ensure that they have emergency briefing on hand on all the questions.

Nicholas Winterton: In my view, the Minister has been very gracious. I am sure that the Committee is pleased with her honesty.

Question put and agreed to.

Schedule 26 agreed to.

Clause 80 ordered to stand part of the Bill.

Clause 81

Abolition of allowances from 2011

Philip Hammond: I beg to move amendment No. 217, in clause 81, page 44, line 15, leave out subsections (2) and (3).

Nicholas Winterton: With this it will be convenient to discuss amendment No. 184, in clause 81, page 44, line 16, leave out subsection (3).

Philip Hammond: I shall make substantive comments in the clause stand part debate, but I just want to refer now to a narrow, drafting issue. Amendment No. 194 deals with the issue in a slightly different way. Amendment No. 217 would leave out subsections (3) and (4). The amendment tabled by the hon. Member for Taunton only seeks to leave out subsection (3), for some reason which he will no doubt explain.
It is a question of understanding the clause a little better. We believe that subsections (2) and (3) are redundant. Subsection (1) says that industrial buildings allowances and agricultural buildings allowances do not apply after the relevant date, which is provided in subsection (4) as a date in 2011. Having established that IBAs and ABAs will not apply after a date in 2011, why is there then a need in subsection (2) to abolish the provisions that introduced IBAs and ABAs—in other words, to make it as though they never existed? Why effect that abolition only from the relevant date in subsection (3)?
It seems to me to make no difference at all if subsections (2) and (3) are removed from the face of the Bill. This is just a drafting issue, but we already have the longest tax code in the world, and we do not want to make it unnecessarily longer—even by two subsections. We can deal with this matter perfectly adequately simply with subsections (1) and (4).

Jeremy Browne: I think the ground has been covered by the hon. Member for Runnymede and Weybridge. I would like to speak to clause stand part, but I waive this opportunity to speak to the amendment.

Jane Kennedy: We are clearly going to have a debate of some substance on clause stand part, so I will reserve my more general comments for that. The amendments tabled by both Conservative and Liberal Democrat members of the Committee seek to apply the withdrawal of IBAs and ABAs only to expenditure incurred after the relevant date, which is to say 1 April or 6 April 2011. This means that anyone who incurred expenditure on industrial or agricultural buildings up to 31 March or 5 April 2011 would still be able to claim the full amount of IBAs or ABAs.
It is not clear to me why Conservative or Liberal Democrat Members would wish not to apply the withdrawal to expenditure entered into in the knowledge that IBAs and ABAs were being withdrawn—that is, any time after the announcement in 2007. The hon. Member for Runnymede and Weybridge asked me a specific question about subsections (2) and (3) and suggested they were redundant. Subsection (1) applies to expenditure incurred after April 2011, and subsections (2) and (3) remove the allowances for existing expenditure. I am not sure whether that entirely answers his question.
With regard to expenditure before that point, just as corporation tax is an annual tax, so IBAs and ABAs provide an annual entitlement to claim relief. It is not therefore retrospective to repeal the entitlement to these allowances, as has been argued. I and other Ministers have made clear since the announcements in the 2007 Budget the reason for the withdrawal of these allowances, which is to remove the distortion they cause by giving tax relief selectively to certain sectors while leaving other sectors completely unable to enjoy relief of this nature.
That change was part of the wider package we debated earlier today. Just 200 claimants claim 95 per cent. of the value of IBAs: the vast majority of relief goes to companies, and only 6 per cent of the combined total is claimed by the unincorporated. I will not go into the more general points, which I wish to make in the clause stand part debate, but I hope that I have dealt with the specific question asked by the hon. Member for Runnymede and Weybridge.

Philip Hammond: I am not sure that the Financial Secretary has answered my question, to be honest. Let us run through the logic of this because she presents her argument in a reasonable way. Subsection (1) says:
“Parts 3 and 4 of CAA 2001...do not apply in relation to expenditure incurred on or after the relevant date.”
That date is in April 2011. Therefore, parts 3 and 4 do not apply to any expenditure incurred after April 2011. The Government want to ensure that any money spent after 2011 is not eligible for industrial and agricultural buildings allowances, so the job is done in subsection (1).
Why does subsection (2) need to say:
“Omit those Parts of that Act”?
Why does subsection (3) need to say not to omit those parts of the Act until after April 2011 because doing so would mess up the whole architecture? Why do we need to omit them at all when we have neutered them in subsection (1)? We were probing to suggest that subsections (2) and (3) were redundant.
There are worse things in tax law than redundancy. I was hoping that the Financial Secretary might just say, “Yeah, you’re right. This was pretty low-grade drafting. We don’t need them. We’ll take them out. Thanks very much.” She did not say that. I will not detain the Committee by pressing the point, but I hope that when she is sitting at home with a gin and tonic in her hand and nothing better to do, she will read the clause again and consider whether she needs an answer to this point. [Interruption.] Sorry, a tonic water. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Philip Hammond: The clause provides for abolition of industrial and agricultural buildings allowances. That decision was announced without any prior consultation by the Government. Regardless of the merits of the substantive action, the Government’s precipitate action in relation to business taxation has once again undermined the UK’s reputation as a safe and secure place to do business. I have thought about this quite a bit and I do not believe that Ministers want to damage the UK’s business reputation. Therefore, I have to conclude that they simply do not understand the way that business thinks and the way that it reacts to this kind of surprise being sprung upon it.
The business mentality is simple and straightforward, as you know, Sir Nicholas. Businesses like certainty. Anything that undermines their sense of certainty and their understanding of the direction of travel in the environment in which they are operating is debilitating. In practical terms, it increases the premium and the return that businesses need to operate in that environment. Businesses operating in an uncertain and unstable environment need a higher rate of return than businesses operating in a stable and predictable environment.
The Opposition’s concerns relate not so much to the principle of the abolition of the allowances. Our preference is well known for a simplified system with fewer allowances and lower rates. Our concern is over the handling of this matter. A huge degree of retrospectivity is attached to the provisions of clause 81 and schedule 27. The abolition of the allowances as part of a general simplification and reduction in rates of taxation may be acceptable, but investment decisions have been made on the basis that industrial and agricultural buildings allowances are in place. The announcement of their abolition in the 2007 Budget was too late for people who had committed to investment decisions.
We will all have in our minds the image of terminal 5 nearing completion at the time of the 2007 Budget announcement. Frankly, that sudden change is yet another nail in the coffin of Britain’s reputation as a safe and predictable place in which to do business. I ask the Minister to imagine how she would feel if she had spent £5 billion of her savings constructing a building in anticipation of industrial buildings allowance being available, only to be told just as the roof was going on that this allowance was going to be scrapped. She would be pretty cheesed off with the regime and she would be thinking very hard about whether she wanted to make further investments on that basis.
It is very important that when Government do these things and when we in Parliament allow them to go through, we do so with our eyes wide open. The package of measures that we are considering in this Committee represents a significant shift in the burden of taxation between sectors. The abolition of IBAs will hit some sectors particularly hard. Airport operators are the most prominent example of losers, but the accelerated rate of depreciation on long-life assets will hugely benefit utility companies.
As Britain’s largest airport operator, BAA faces the withdrawal of tax relief on investment worth some £5 billion that the group has already made on infrastructure assets at its seven UK airports. The Minister will know that BAA is in the process of proposing to invest very substantial further sums in Heathrow, which in its current state, as everyone in this Committee would agree, is something of a national disgrace and yet another impediment to promoting Britain’s attractiveness as a place in which to do business. The creation of the Heathrow east terminal complex very badly needs investment. The net present value of the reduced post-tax cash flow implied by the abolition of IBAs to BAA alone is around £500 million. Can the Minister tell us how such a move will impact on company balance sheets under generally accepted accounting practice? Will companies have to take a hit on their balance sheets to reflect the changed anticipation of future tax liability as a result of these changes to IBAs and ABAs? Will it show up on company balance sheets?
I fully recognise that there will be lots of members of this Committee—I will not say listening because they are probably not—who might not be that inclined to feel sympathetic towards BAA. I fear that such a view misses the point. This is not just about BAA. It is about the signal that we are sending to any potential large-scale infrastructure investor in the UK about the certainty of the tax depreciation regime that they face. Investment decisions are based on models using current and known tax regimes. Sudden and effectively retrospective changes alter the returns that have been predicted. That will impact on our ability to get private sector investment into infrastructure projects in the UK.

Mark Todd: I have been listening and have sympathy with some of the points that the hon. Gentleman makes. What would his optimum time scale be for planning the sort of tax changes that he talks about? He is not disputing the principle of simplification. He is arguing that it needs to be planned over a longer period of time. What would his recommended time scale be?

Philip Hammond: That is a sensible question, and I would like to answer it. I do not have a prepared answer, but I will answer it on the hoof. I will divide the question into two parts. In most cases, I would say that a three-year cycle of signalling to business the Government’s intentions for the tax regime and then fleshing it out a year or two in advance so that there can be a proper consultation period is probably the right regime. I have said that in other places and I will say it again today. Business would be hugely reassured by a commitment to a three-year rolling programme. In each year’s pre-Budget report, the Chancellor could set out the general direction in which he expects business taxation policy to travel over the coming two or three years. In the following PBR he perhaps sets out some more detailed proposals, which can then be consulted upon and brought into concrete form in the PBR after that. That would be a constant rolling process.
There is a different issue around large-scale, effectively Government-mandated infrastructure. The terminal 5 project has been going on for decades. Almost one of the first things that I did as a Member of Parliament was to appear at the terminal 5 planning inquiry. We have only got the thing open now. There is an issue about significantly impacted companies and pieces of infrastructure needing to be the subject of specific discussions between Government and the providers of those pieces of infrastructure, to ensure not only that we do not have an unfair effect—with respect to BAA, it is tough out there—but that we do not have an unintended impact on future behaviour by that company or similar companies. We will need other airport facilities in this country in the future.

Mark Todd: I do not want to prolong things with my colleagues, but it is an interesting line of discussion. The nearest example of something similar that I can think of at the moment is incentivising development of major investments in the North sea, to take a further phase—that is a quasi-Government initiative, or potentially so. That might raise some of the issues that the hon. Gentleman is talking about.

Philip Hammond: I think that the hon. Gentleman’s argument is a good one. One can envisage such situations with railway or new road infrastructure, if we are trying to encourage private companies, as the Government have done with the M6 toll motorway for investment in road infrastructure. Similar considerations would apply—very long payback periods for very durable pieces of investment.
However, I think it gets worse. With regard to the airport infrastructure in particular—let us use that as an example—it is going to be about price. It is all very well to talk about the matter as if it will be tough luck on BAA, but what happens when we withdraw an available tax relief or defer its benefits? Deferring a relief in time costs money. We will increase the cost of providing that infrastructure in future. It will be end users who have to pay more. The incidence of the tax change will ultimately fall on end users of publicly used infrastructure such as airports.
It is worse still, even with regard to existing, historic investment. BAA is a regulated operator. It has a restriction on the rate of return that it can earn on its capital base. I would like the Minister to confirm to the Committee whether the abolition of IBAs—thus, the reduction of the tax relief that BAA will earn—will have the effect of increasing its regulated asset base. It seems to me that it will, thus increasing the amount of income that the company is permitted to earn from its regulated activities. If that is the case, put in plain English, what that means in the case of a regulated operator is that the abolition of IBAs, even in respect of past capex, is not effectively a hit on the operator, but becomes a hit on its customers. When travellers are facing fuel surcharges and the effects of the currency markets’ verdict on the Government’s economic policies, that apparently non-consumer-related tax change will, in the end, be paid for by the users of those regulated infrastructure services. The users will have to pay higher charges in order to deliver BAA and others the return on their regulated capital base that is permitted under the terms of the operating licence. Would the Minister please confirm whether that is correct, and that it is, once again, the ordinary consumer—one might say, the ordinary voter—who is going to pay for the tax change?
Mr. Brownerose—

Nicholas Winterton: Before I call the hon. Member for Taunton, who speaks for the Liberal Democrats, let me say that I have now been in the Chair for two and a half hours. I understand that the Government and Opposition are seeking to get to the end of clause 86. For my own good health, I would seek to adjourn the Committee for a dinner or refreshment break. I am prepared to go as late as 8 o’clock, but I would then seek to adjourn for three quarters of an hour. I merely offer that as advice to the Committee, whose interest and mine I am taking into account.

Jeremy Browne: This is my first opportunity to welcome you to the Chair, Sir Nicholas—just as you outline the timetable for vacating it. While I make a few brief comments, perhaps the Whips for the other parties could arrange a more civilised timetable for our departure.
I shall speak briefly to clause 81, on which I have received a number of representations from interested parties. The hon. Member for Runnymede and Weybridge has already outlined the principles underlying the difficulties that many people have with the Government’s proposal. To sum up my position, I think that there is a genuine point about a lack of consultation and, as a result, the retrospective nature of the changes being put in place. They were sprung on those affected, who could have had no reasonable expectation that they would be put in place. There is also an issue of certainty—or in this case, lack of certainty—about business planning decisions made over a quarter of a century. The expectations and time scale that people have in mind when making such investment decisions are long-term, and the Treasury is acting on a completely different time scale, which changes the approach that people would otherwise have taken had they known in advance.
Then, of course, there is the absolute effect of the withdrawal itself. For illustrative purposes, it is worth explaining to the Committee what the impact will be. A person who made an investment of £100,000 in 2006-07 would receive a £4,000 allowance in 2006-07 and 2007-08. After that, it would go down, on the graded scale put before us, to £3,000 in 2008-09, to £2,000 in 2009-10, to £1,000 in 2010-11, and that would be it—the guillotine would fall. They could claw back £14,000 of their £100,000, but £86,000—at the cut-off point in April 2011—would remain unrelieved for tax purposes. It is not hard to see why many people, who made that decision in good faith in the 2006-07 financial year, with no expectation of any changes in the foreseeable future, because no consultation took place, are aggrieved that 86 per cent. of the relief that in good faith they had anticipated receiving is no longer available to them.
A retrospective 25-year time scale could impact on investments going right back to the 1980s. People who invested in the 1980s will obviously have received most of the relief already, but they would still have qualified for some of the relief being tapered off, which consequently they might not receive. So we are talking about business decisions taken over a very long period. The Institute of Chartered Accountants made the point that in accountancy terms—it does not judge the politics of the proposal—the abolition would be neater and more reasonable if only expenditure incurred after the 2007 Budget statement was affected. It would be interesting to hear the Minister’s response to that specific point.
I shall conclude with a couple of questions. How much revenue will the abolition of the allowances be likely to raise for the Treasury? I sourced an estimate in the region of £15 million annually, but that sounds far too low, particularly taking into account the points made by the Conservative spokesperson. However, if there is scope for significant revenue to be clawed back, it would be interesting for the Minister to give a figure. Furthermore, given that it is being tapered out, what will that figure be on a rolling basis, through to the absolute abolition in 2011? It would also be interesting if she indicated how much impact the measures will have on businesses in the United Kingdom, which is a slightly different point from how much revenue will be raised for the Government. Finally, she would do the Committee a service if she outlined precisely what form of consultation the Treasury embarked upon in advance of making the changes, and what lessons it learned during that process.

Jane Kennedy: The clause withdraws industrial and agricultural buildings allowances with effect from April 2011 and introduces a schedule containing various consequential amendments and savings, which we have been considering. The hon. Member for Runnymede and Weybridge, who is deep in the throes of negotiating his way through the proposition that you just made, Sir Nicholas, asked a number of questions, but other points have been made.

Mark Todd: We would be interested in hearing the answers.

Jane Kennedy: Exactly.
Our changes to capital allowances, which are associated with the abolition of IBAs and ABAs, are principled and reasoned. They are a necessary step forward. I have been listening to the concerns expressed from all parts of the Committee, and I have had representations on them, so I continue to look closely at how the whole change will work in the coming months and years.
The changes have sound reasons behind them. They refocus the incentives for investment in innovation by removing the inefficient and distortive features of the current system. One example that I was given when discussing the changes was that a company may gain industrial buildings allowance for a particular type of investment, but a similar set of companies, if they wanted to develop, for example, a bus station, would not be entitled to that allowance. There is a serious distortion in the way that the current system works, but our proposals are also part of a wider reform package that includes the 2 per cent. reduction in the main rate of corporation tax, which is effected to promote investment and growth. By realigning the rates of allowance more closely with the average rates of depreciation, the reforms remove the distortions between investment decisions and between sectors.
The Budget package is not intended to target particular sectors—one or two sectors have been mentioned this afternoon—but is intended to remove the distortions between the sectors that are currently inherent in the system. Our primary driver for the withdrawal of the IBA and the other wider reforms is the desire to reduce the tax system’s distortive impact on commercial decisions.
One guiding objective was simplification. The IBAs have long been recognised as a significant compliance burden, and in responses to the 2002-05 corporation tax reform consultation, and in the independent administrative burden advisory board’s list of priority irritants of the tax system, the IBA features. To leave IBAs in place would mean retaining that burden and complexity in the system for up to 25 years. It would also continue to give a tax advantage to some sectors by providing that relief.
The hon. Member for Runnymede and Weybridge asked how we consulted on the measure. The allowances are not being withdrawn overnight. We announced in the 2007 Budget that they would be gradually withdrawn over four years, and we did so to give businesses time to plan and to adjust to the change, as I explained last year—

Philip Hammond: Will the hon. Lady give way?

Jane Kennedy: If I can just finish my sentence, I shall be happy to give way.
It is not our policy to consult on changes to rates of taxation or allowances, or on the removal of allowances, although we invite evidence. We consulted extensively on the new elements of the capital allowances reforms, such as the design of the AIA, and we received many useful comments that we reflect in the new relief for small pools of unrelieved expenditure introduced by clause 78 to name one example. We are giving business the certainty it demands by setting a clear direction and by consulting on the technical details.

Philip Hammond: The Minister said that announcing the intention to withdraw IBAs four years in advance of the full withdrawal date should give business the opportunity to plan and prepare. How does she suggest that BAA plans and prepares for the withdrawal of the IBAs that they factored into their business model when they decided to invest £5 billion in terminal 5?

Jane Kennedy: The hon. Gentleman asked me a question on a point that I will come to in a moment.
The Committee needs to be reassured that, if we left things as they were, the current system of capital allowances would not result in a fair outcome for all businesses. The reality is that industrial buildings allowances are a relatively small tax relief: they apply to only 30 per cent. of property value and only 5 per cent. of the value goes to small firms. There are a total of 25,000 to 30,000 claims per year, but as I have already said the top 200 claims account for more than half the cost. I do not want to get drawn into debating one company in isolation. I acknowledge that there are consequences not just for BAA, but for other businesses. However, it is important to remember that the top 200 claims out of up to 30,000 claims a year account for more than half of the cost. The true objective of the reforms is to leave the UK with a better, modernised tax system.
I was asked how the provision will impact on company balance sheets. The rules for deferred tax accounting are complex, as I have learned. The loss of industrial buildings allowances may need to be recognised, but it is important to note that BAA was also able to recognise a credit in this year’s accounts for the reduced rate of corporation tax. Any accounting impact is distinct from the tax impact.
The hon. Member for Taunton asked how much revenue would be raised by abolition. I direct him to the Red Book, which shows that in 2008-09 to 2010-11 the yield will be £75 million in the first year, £225 million in the second year and £375 million in the third.
I appreciate that hon. Members are conscious of the time and I do not want to detain the Committee, but I should like to take a moment to explain things a little bit further because this is a serious issue that is worth exploring in detail. Both my hon. Friend the Member for South Derbyshire and the hon. Member for Runnymede and Weybridge raised concerns about the impact of these changes. The latter said that the changes should be made in a three-year cycle. I understand that that is part of the recommendation from the CBI business tax taskforce. I am attracted to that idea. However, as I have said, the Government gave a four-year period of notice that the allowances would be gradually phased out. Those allowances will only begin to be reduced from this April and they will not finally be withdrawn until April 2011.
Clause 81 plays an integral part in the reforms that were advanced in 2007. The IBAs and the ABAs were introduced more than 60 years ago as an incentive for post-war reconstruction and agricultural recovery. They no longer reflect the reality of modern business. There is no good economic case for continuing to provide a selective subsidy to some buildings but not others. Indeed, the existence of those allowances has distorted commercial property investment decision making by providing a tax relief that reduces the costs of such buildings relative to shops and offices, for example, which do not receive relief. We have decided to withdraw those allowances on the basis that they have become a poorly focused subsidy that is selectively available on a disparate range of assets, some of which appreciate in value.

Jeremy Browne: Why did not all the arguments that the Minister has just made apply in the then Chancellor’s first Budget in 1997? Why did it take 10 years for him to find them compelling?

Jane Kennedy: My right hon. Friend the Prime Minister is on record as having expressed trenchant criticism of the idea. I shall not quote him without having his words to hand, but for some time he has been saying that the building allowances were poorly targeted and are in need of reform.

Jeremy Browne: Is the Minister implying that businesses that paid close attention to the Prime Minister’s words and indications when he was Chancellor would have had a sense that the allowance was to be abolished, and that it was not entirely retrospective for those who did pay close attention because, as Chancellor, he had a long track record of indicating that he was looking to bring the allowance to a close before finally doing so in 2007?

Jane Kennedy: I can be flippant, but it certainly was not my intention to suggest that businesses should have known because the allowances had been criticised. The hon. Gentleman will know that the allowances have been criticised heavily for their lack of focus. Although the steps that we are taking raise questions of which I have been taking careful note, they will none the less bring about a better regime.
I said that the allowances have long been recognised as imposing a significant administrative burden on business. That was established in 2006 by a measuring exercise of compliance burdens. However, rather than withdrawing the allowances overnight, we decided to give businesses time to plan. In the 2007 Budget, we announced that the allowances would be phased out over four years. The large companies of which we have spoken—BAA has been singled out—will benefit from the reduction in the main rate of corporation tax. Retaining the allowances for expenditure incurred up to 2011 would continue the distortion for future investment. It will mean that until 2036 certain businesses will receive tax relief that other businesses do not. That is inefficient and inequitable.
Business property—buildings and land—can appreciate rather than depreciate in value. Giving depreciation relief therefore does not make sense. Buildings are also eligible for other tax relief—for example, on the interest payments if they are purchased through borrowing—

Philip Hammond: Will the Minister give way?

Jane Kennedy: I will when I reach the end of this sentence. Tax relief is available on the interest payments if the buildings are purchased through borrowing and on the maintenance and repair of the building, and relief is given through the corporate capital gains system when they are sold.

Philip Hammond: The Minister says that it does not make sense to give relief on buildings that may appreciate, but if that is her concern why—I think it was in the Finance Act 2006—did the Government abolish balancing charges and allowances in respect of IBAs?

Jane Kennedy: The hon. Gentleman must forgive me once again. In the light of comments made in this debate, not least those of my hon. Friend the Member for South Derbyshire—I know that other Labour Members in Committee and in the House are concerned that certain businesses in their constituencies are affected—I want to take note of the representations being made about our proposals. I cannot answer the hon. Gentleman immediately, but I shall write to him on that and any other questions that he has raised that I have not been able to answer in detail.
Financing the phased withdrawal of the allowances will give business time to plan. We are taking an important step, as I have said, to improve the efficiency of the tax system and to reduce complexity, as well as undertaking a wider package of reforms. Clause 82, which we shall come to shortly, contains provisions for the phased reduction of the allowance. Our approach will allow business to calculate the amount of allowance to which they are entitled and then to restrict the amount that can be set off by a quarter, a half, three quarters and then in full. That effectively gives an allowance rate of 3 per cent., 2 per cent., 1 per cent. and finally 0 per cent., at which point there will be no allowance to claim. Clause 81 is intended to repeal legislation that no longer provides relief from the relevant date. I hope that the Committee will give the clause a fair wind.

Bob Blizzard: I beg to move that the debate be now adjourned.

Nicholas Winterton: If the Government Whip wishes to do that, we may adjourn. I thought that we might complete this stand part debate.

Bob Blizzard: On a point of order, Sir Nicholas, I understood that the hon. Member for Runnymede and Weybridge wished to get away.

Nicholas Winterton: Is that the position? I seek to work for the Committee. I thought that it would be sensible to conclude the clause stand part debate. Is there any opposition to that? I indicated that I was perfectly happy to go on for a little while yet.

Philip Hammond: Further to that point of order, Sir Nicholas, it was my understanding through the usual channels that the Committee intended to rise at 7 o’clock. I did have a pressing engagement that I wished to attend in my constituency. If we are not to rise at 7 o’clock, as it appears we are not, I no longer have such a pressing engagement and do not feel constrained in the questions that I want to ask the Minister in relation to clause 81. I am very happy to continue if that is the Committee’s wish.

Nicholas Winterton: Again, we do not want a major debate on this. It is helpful if a debate is concluded rather than being left over until Thursday.

Bob Blizzard: Further to that, Sir Nicholas, my understanding is that it is not within the rules of the Committee to move an adjournment in the middle of a speech. I sought to wait until the Financial Secretary had finished her speech before moving the adjournment, so that it was as close to 7 o’clock as possible. My understanding is that it is not the done thing or that it is against the rules to leap up in the middle of a speech to move an adjournment. That is why I left it until after the Financial Secretary had finished her remarks.

Nicholas Winterton: May I say that it is not appropriate that the Government Whip should seek to move that the debate be further considered on another occasion in the middle of a speech? However, if the Government Whip wishes to put the motion again, I am obliged to put it to the Committee. Is it the wish that the Committee should continue for a little while or does the Committee wish to adjourn now?

Bob Blizzard: I am happy to carry on if the hon. Member for Runnymede and Weybridge wishes to do so.

Nicholas Winterton: I am happy.

Philip Hammond: It is always up to the Government Whips to decide what tone the Committee operates under.
This is a very important clause and I do not feel that the Financial Secretary’s response displayed a clear understanding and appreciation of the significance of these changes. She talked about the Government’s announcement in 2007 that industrial and agricultural buildings allowances would not be phased out fully until 2011. She suggested that that has somehow given business the opportunity to plan and prepare. The issue of the businesses with which we are most concerned today—particularly the one that has been referred to—is not about future expenditure, but past expenditure. Whether there is two or five years’ notice, there is no opportunity for businesses in that situation to do anything differently. There is nothing that they can do to mitigate the effects of the decision that has been made.
The broader point is that this measure sends a message to businesses in general about the predictability of the UK tax regime. With respect to the Financial Secretary, I do not feel that she has addressed that point. That is disappointing because I would have thought June 2008 was a point when all Treasury Ministers would be acutely sensitive of the need to try to row back and repair some of the damage that has been done to the business community and to the UK’s once enviable reputation for being a stable, predictable and business-friendly tax regime. Indeed, one of the great claims of the Government of Mr. Tony Blair was that he made a Labour Government compatible with the business interest.
Yet, in just a year, all that work has been blown away—sometimes, frankly, in a careless manner. I do not believe that Ministers deliberately set out to send a different message to business, but the Financial Secretary should be aware that in practice that is what has happened.
We have so far talked pretty much exclusively about industrial buildings allowance and industrial companies. However, we should not forget the impact that these measures will have on agriculture, where many small and perhaps struggling agricultural businesses will now effectively have a retrospective change in the tax treatment of an investment that they made perhaps many years ago in respect of agricultural buildings. To use her phrase, how does the Minister expect them to use the four years between 2007 and 2011 to prepare for the abolition of agricultural buildings allowance? Certainly, what has happened will change their attitude to future investment, and that should be of concern to us at a time when the need to increase food production is on everyone’s agenda and is an urgent necessity not just in this country but across the globe, as I believe the Prime Minister said yesterday. There are constraints in food supply, rising food prices and the possibility of serious food shortages in some parts of the third world, coupled with dramatic food price inflation in the UK and elsewhere. We need to think about the impact on agriculture of any measures that are announced.
In fairness, when the measure on ABA was announced in 2007, no one anticipated the surge in food prices or that there would be a problem on this scale. Have Ministers taken stock of the situation in the light of the new circumstances and begun to consider whether the abolition of ABAs at this time sends a damaging signal to potential investors in agriculture?
On the more substantial issue of industrial buildings allowance, the Minister needs to understand that because the life of an industrial building is likely to be very long, investment decisions made as long as 20 years ago will still be affected by the decision to withdraw ABAs. I sympathise with the overall intention of reducing allowances and exceptions to lower rates—although I would like to see rates lowered more—but I consistently come back to the fact that in the manner of doing such things the Government can inflict huge damage. Equally, they can mitigate much of that damage if they do things in the right way.
A few moments ago, the Minister said that it was not the Government’s practice to consult on or preannounce changes in rates. I am not sure that I understand the measure to be merely a change in the rate: it is the wholesale abolition of an allowance and has very significant consequences. Unfortunately, I do not have a specific example—although perhaps by Report I will have discovered one—but there will be people out there who made investment decisions in respect of industrial buildings in anticipation of receiving industrial buildings allowance. They might, for example, have made those decisions in the winter of 2006-07 when a preannounced intention would have been expected to be under consultation. Those people would rightly feel aggrieved; if they had had notice, they might have taken different decisions. Considerable costs are being inflicted on UK plc by the manner of carrying out this activity.
I shall now return to BAA. The Minister answered some of the questions on BAA and, in particular, acknowledged that it might be necessary for the changed tax treatment to be reflected in an adjustment to the balance sheet, but she did not deal with the question that will be on many Committee members’ minds about the ultimate incidence of the change. Who will bear the ultimate cost of it? In particular, unless I missed it—if I did, I apologise—she did not deal with the question of an infrastructure provider subject to IBAs who operates under a regulated rate of return regime, as BAA does.
I am not an accountant, although two of my Front-Bench colleagues are, but my understanding is that because of the lack of IBAs, the relevant capital employed in the business will effectively increase. Since BAA is allowed to earn a fixed rate of return on its relevant capital investments, that implies that first the airlines but, ultimately, the travelling public will pick up the tab for this. They will do so by facing higher charges as BAA seeks to achieve that permitted rate of return on what will now be a higher relevant capital base. The Minister has not answered that point and I think that Committee members would find it useful if she told us whether that analysis is correct. Will the return that a regulated operator is permitted to earn in that way go up as a consequence of the abolition of IBAs, thus passing the burden back to the already hard-pressed travelling public?
I have a broad concern that the Government do not understand the significance of the signal that they are sending. They understand clearly the specifics of the revenue implications of the changes being made, and I deliberately have not disagreed with the principle behind the direction in which they are travelling. But I hope that Ministers will reflect on the damage being done when changes such as this are made without adequate forewarning, adequate signalling and proper consultation. I leave the Government with this thought: it is not just the UK’s reputation that is damaged when inadequate consultation and signalling occurs—it is the Government’s reputation. If the Minister is not worried about the UK’s reputation as a place to do business, she certainly will be worried about her own party’s reputation as a party that does have some recognition of the needs of business and perhaps even, in some respects, tries to understand it.
I hope also that the Minister may, by now, have the answer to my question about balancing charges and allowances in respect of IBAs, which I suggested to her would have been a solution to the problem that she set out of buildings possibly appreciating in value, which she seemed to think was a difficulty. That could be easily addressed by the imposition of balancing charges—something which her Government abolished, I think in the Finance Act 2006, although it may have been the Finance Act 2007.

Jane Kennedy: I believe that I gave a thorough reply to most points made in this short debate on this important clause. The hon. Gentleman knows that we do not sit at his convenience. Had I realised that he was under a particular difficulty, we would perhaps not have had the trouble that we have had. I answered his point on balancing charges when he was temporarily out of the room, and I will revisit Hansard to ensure that I picked up the point exactly. To reiterate, balancing charges were abolished to pave the way for the withdrawal of the allowances in the Finance Act 2007—that is, last year, not 2006.
The gradual withdrawal of industrial buildings allowances should not be seen as destabilising. It is part of a wider package to improve the UK tax system, and the package as a whole is designed to achieve a sensible rebalancing of the tax system.

Philip Hammond: Is the right hon. Lady saying that in advance of abolishing IBAs, balancing charges and balancing allowances were abolished, so that people who owned assets subject to IBAs could not plan for the intended abolition of IBAs by selling those assets on and realising the loss ahead of this measure coming into force?

Jane Kennedy: The advice I have is that the change was designed to prevent forestalling and other behaviours that would otherwise have allowed some businesses to accelerate allowances in an unfair or unequal manner, compromising the Government’s intention to withdraw these allowances in a fair and orderly way.
By realigning the rates of allowances more closely with the average rates of depreciation, as this overall package does, the reforms remove the distortions between investment decisions and between sectors. The package is fiscally sustainable in the long term, and refocuses the regime on investment and growth. Very briefly, on agricultural buildings allowances, the withdrawal of ABAs was not an isolated measure. It is part of the package, which we have been discussing all afternoon, that saw the reduction in the main rate of corporation tax and the introduction of a £50,000 annual investment allowance, allowing 95 per cent. of businesses to write off all their expenditure on plant and machinery other than cars in the year in which they make it.
Our decision to withdraw IBAs and ABAs was based on an assessment of a number of issues common across industry sectors. We have not sought to target either the finance industry or the airport industry. I therefore reject the hon. Gentleman’s generalised dismissal of the approach we have taken, but I acknowledge that there are instances of impacts that are of concern; I know of one or two examples. I nevertheless believe that the overall package is a good package.

Philip Hammond: Will the hon. Lady give way?

Jane Kennedy: I ought not to. I have been far too generous, but on this occasion I will give way one more time

Philip Hammond: The Minister is always very generous. Would she at least acknowledge that the impact of this is that the provision of infrastructure in future that involves buildings that would have qualified for IBA will become more expensive, and that where that is publicly used infrastructure—whether it be airports or privately provided train stations—it is bound to be more expensive? There will be a cost in doing this.

Jane Kennedy: I do not immediately acknowledge that that will be an absolute consequence of these changes. The largest companies, such as BAA, benefit the most from the reduction in corporation tax. Overall, they will benefit from these changes and in making future decisions on investment they will benefit from the AIA. I know the hon. Gentleman’s concern, and it is right and proper for him to press that concern, but I believe that the package of changes that we are bringing forward as a result of these measures will, in the long term, enormously benefit the British economy.

Question put and agreed to.

Clause 81 ordered to stand part of the Bill.

Nicholas Winterton: We have gone on, but I believe it was appropriate and helpful to the Committee to complete clause 81.
Further consideration adjourned.—[Mr. Blizzard.]

Adjourned accordingly at half-past Seven o’clock till Thursday 5 June at Nine o’clock.